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ACCT 201: Exam 2
Fraud
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Intentional misrepresentation of facts
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Misappropriation of Facts
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Employees stealing from the company
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Fraudulent Financial Reporting
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Making false entries to make your company seem more profitable
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Internal Control
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Controls set in place to prevent fraud and/or handle the situation once it has occured
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Sarbanes-Oxley Act (SOX) of 2002
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1. Public companies must issue an internal control report, and the outside auditor must evaluate and report on the soundness of the company's IC.
2. The Public Company Accounting Oversight Board oversees the audits of public companies.
3. An accounting firm may not both audit a public client and also provide certain consulting services for the same client.
4. Stiff penalties for violators--25 years in prison for securities fraud; 20 years for an executive making false sworn statements.
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Components of Internal Control
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Control environment
Risk assessment
Information system
Control procedures
Monitoring of controls
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Bank Reconciliation
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Explains the difference in the book amounts and the bank statement
Bank
Add - deposits in transit, certain bank errors
Subtract - Outstanding checks, certain bank errors
Book
Add - bank collections, interest revenue, EFT receipts, certain book errors
Subtract - service charges, NSF checks, EFT payments, certain book errors
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Short-term Investments
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Most liquid after cash
Can easily be turned into cash
Expected to be held for one year or less
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Trading Securities
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Held for a short time then sold
Can be debt or equity securities of another company
Earn interest or dividend revenue
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Accounts Receivable
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Money owed for selling a good that hasn't been paid yet
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Notes Receivable
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Gain interest
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Allowance for Uncollectable Accounts
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Percent of Sales - estimated % uncollectable * revenue
Balance Sheet approach - company develops an aging schedule to write off Accounts Receivable
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Quick Ratio (Acid-Test Ratio)
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(Cash + short-term investments + net current receivables)
___________________________
Total current liabilities
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Inventory
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Cost of inventory on hand
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Cost of Goods Sold
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Cost of inventory that has been sold
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Gross Profit
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Shipping Terms
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FOB Shipping Point - possession changes once it leaves the seller; buyer pays shipping
FOB Destination - possession changes once it reaches the buyer; seller pays shipping
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Inventory Methods
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Perpetual - used for all types of goods; keeps a running total of all goods bought, sold, and on hand; inventory counted at least once a year
Periodic - used for inexpensive goods; does not keep a running total of all goods bought, sold, and on hand; inventory counted at least once a year
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Specific Unit
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Used for businesses with unique inventory items (cars, jewelry, real estate)
Inventory expensed at specific price of the particular unit
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Average Cost
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Cost of goods available ÷ number of units available
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First in First Out (FIFO)
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Oldest items are assumed to be sold first
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Last in First Out (LIFO)
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Newest items are assumed to be sold first
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Principles Related to Inventories
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Consistency
Disclosure
Conservatism
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Consistency
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Use the same accounting methods from year to year
Allows investors to compare financial statements from one period to the next
Companies are permitted to change methods but must disclose effect on net income
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Disclosure
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Financial statement should disclose enough information for users to make informed decisions
Information should be relevant and representationally faithful
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Conservatism
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Accountants use caution and care in financial reporting
Anticipate no gains, but provide for all probably losses
If in doubt, record an asset at the lowest reasonable amount and a liability at the highest reasonable amount
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Lower of Cost or Market (LCM)
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Inventory is reported at the lower of the cost or the market price
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Gross Profit Percentage
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Gross profit ÷ net sales
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Inventory Turnover
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Cost of goods sold ÷ average inventory
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Average inventory
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(Beginning inventory + ending inventory) ÷ 2
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Depreciable Cost
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Asset cost - residual value
*Residual value is the value you expect to get when you are done with the item
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Straight-Line Depreciation
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Depreciable cost ÷ useful life (years)
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Units of Production Depreciation
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Depreciable cost ÷ useful life (units)
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Double-Declining Depreciation
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2*(Depreciation cost) ÷ useful life (years)
Ignore the residual value until the last year
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